1. Copyright© JSE Limited 2005 www.jse.co.za The Role of Commodities Markets in Wealth Creation in Africa Africa – An Investment Destination Conference September 18 - 20, 2006. Sandton Rod Gravelet-Blondin Agricultural Products Division, JSE Limited

2. © 2 The Role of Commodities Markets in Wealth Creation Clear on where we are going Not talking of creating personal wealth by speculating in “pork bellies”! Otherwise we could just as well entitle this, “The role of commodities markets in wealth Destruction”

3. © 3 The Role of Commodities Markets in Wealth Creation Wealth Creation: the building up, over time, on a sustainable basis of a collection of economic assets that can be used to firstly maintain, in inflationary times, and secondly, increase in normal times the overall standard of living in the future. Involves: 1. Efficiently using productive resources 2. Effectively managing risk. Concentrate on Agricultural Commodities

4. © 4 The Role of Commodities Markets in Wealth Creation An Organized, Centralized Spot or Physical Commodity Market (trading physical agricultural products) Brings :Price discovery (adds value in that the market has a transparent price) Market Access (adds value in providing a recognised channel to market product) Note however: a market in itself it does not create wealth, but it does add value to the marketing process if a sophisticated spot market does not exist. Without an organized, centralized spot market the producer must make sure the price received is a true reflection of the value of the product and a buyer must be sourced. A market does not necessarily ensure a better price, but it does facilitate the marketing of a product.

5. © 5 The Role of Commodities Markets in Wealth Creation An Organized, Centralized Agricultural Derivatives Commodity Market (trading Futures and Options Contracts) Brings :Price discovery both for the present AND THE FUTURE (adds value in that the market has a transparent price) Market Access (adds value in providing a recognised channel to market product) Enables the MANAGEMENT OF PRICE RISK (the process of “hedging”) A derivatives market adds significant value to the market in that it provides participants with the ability to manage price risk – a significant risk in agriculture. This deals with the second issue of wealth creation, namely the effective management of risk thereby adding to the sustainability of agriculture within a highly volatile climatic production arena. An agricultural derivatives market does not ensure higher prices, but it does provide transparency in the price process.

6. © 6 The Role of Commodities Markets in Wealth Creation A Derivatives Market DOES NOT automatically increase prices for the producer A Derivatives Market DOES NOT stop droughts and flooding A Derivatives Market DOES NOT on its own increase wealth A Derivatives Market DOES NOT take the place of sound agricultural production policies, ongoing agricultural research and good agricultural infrastructure. A Derivatives Market DOES facilitate PRICE RISK MANAGEMENT if it is operated, understood and USED by participants. A Derivatives Market is a TOOL in wealth creation for the agricultural sector because it allows for sustainable production on a continued basis.

7. © 7 The Role of Commodities Markets in Wealth Creation “in Africa” What is needed to establish an Agricultural Derivatives Market? - an “open” market (free of state intervention) - consistent agricultural policy - products that can be standardized - multiple buyers and sellers - efficient financial policies and infrastructure - efficient legal policies and infrastructure - efficient agricultural policies and infrastructure (including consistent grading standards, safe warehousing and transport) Application to: - a country - a region - a continent

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